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A five - year project has a projected net cash flow of $15,000, $25,000, $30,000, $35,000,...

A five - year project has a projected net cash flow of $15,000, $25,000, $30,000, $35,000, and $20,000 in the next five years. It will cost $80,000 to implement the project. If the required rate of return is 20%, conduct a discounted cash flow calculation to determine the NPV and indicate if you would recommend this project.

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Answer #1

Calculation for net present value under discounted cash flow

Year Annual cash flow Discounting factor (20%) Discounted cash flows
1 $ 15,000 0.833 $ 12,495
2 $ 25,000 0.694 $ 17,350
3 $ 30,000 0.579 $ 17,370
4 $ 35,000 0.482 $ 16,870
5 $ 20,000 0.402 $ 8.040
Total of discounted cash inflows $ 72,125
Less: Initial investment $ 80,000
Net present value of the project $ ( 7,875)

The NPV of the project is in negative value, so this project should not be chosen for investment. Due to the time value of money effect ,if it will be chosen then it will not financially benefits the company .

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